Oct 16, 2023 - Economy

How Rite Aid collapsed into Chapter 11 bankruptcy

A Rite Aid store in the Crown Heights neighborhood of Brooklyn, New York, on Monday. Photo: Michael M. Santiago/Getty Images

The slow-motion collapse of Rite Aid threatens to eliminate the nation's third-largest drugstore chain.

Why it matters: With about 2,100 stores and more than 45,000 employees — including 6,100+ pharmacists — Rite Aid filed for Chapter 11 bankruptcy protection on Sunday, hoping to emerge as a sustainable enterprise.

  • The company — which fulfills 200 million prescriptions annually — said in a court filing that it plans to reject leases at more than 340 locations, having fallen from its perch in the mid-1990s as the nation's largest drugstore chain.

The big picture: How Rite Aid got to the verge of potential liquidation is a case study in how a once-powerful player can lose its grip on a rapidly changing industry.

  • Rivals CVS and Walgreens got bigger while Rite Aid got smaller at a time when ballooning health care costs made it difficult to compete without scale.
  • With costs spiraling and revenue stagnant, Rite Aid's debt started to become too much of a burden, and the company piled up nearly $3 billion in net losses since 2018.
  • That capped how much the company could spend to renovate stores, many of which became visibly tired in decor, lighting and shelving.
  • Then the emergence of new online threats from the likes of Amazon — plus the surging force of in-store pharmacies at big chains like Walmart and Kroger — undermined Rite Aid's reason for being.

What they're saying: "The company had limited ability to invest in improvements, so over time they kept falling further and further," Fitch Ratings analyst David Silverman tells Axios.

When the pandemic erupted, it gave Rite Aid a temporary influx of business in the form of COVID vaccines — and the corresponding foot traffic that boosted sales of other items.

  • "Ever since those benefits started fading a year ago, Rite Aid's been struggling," CFRA Research analyst Arun Sundaram tells Axios.

Then the company started getting hit with lawsuits alleging that it exacerbated the nation's opioid crisis.

  • While not unique to Rite Aid, the accusations became yet another financial and operational burden that depressed the chain's chances of making a comeback.
  • "That was the final straw," Silverman says.

Be smart: Rite Aid tried to get bigger, but federal regulators weren't having it.

  • In 2015, Rite Aid leaders announced a deal to sell the company to Walgreens, but the Obama administration's Federal Trade Commission signaled it wouldn't sign off, and the deal was scuttled.
  • Instead, Rite Aid sold about 1,900 stores and several distribution centers to Walgreens in a down-sized deal.
  • As it turns out, that transaction included "some of Rite Aid's strongest performing locations," the new CEO of Rite Aid, restructuring veteran Jeffrey Stein, said Sunday in a court filing.
  • Then in 2018, Rite Aid announced a merger with supermarket chain Albertsons, but that deal was called off too, this time after some investors and watchdogs cried foul.
  • "Rite Aid tried really hard to sell itself," Sundaram says. "It wasn't their fault that it couldn't get bought. There were roadblocks."

What to watch for: Liquidation is a real possibility.

  • "We've always believed that the company's value is actually maximized in liquidation versus a going concern," Silverman says, noting that Rite Aid's customer list and inventory "have proven to be worth quite a bit of money over time and could generate significant value."
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